Latest Virginia Budget Headed in the Right Direction

Virginia legislators returned to Richmond last week and approved a budget for the next two years that provides nearly $4 billion in tax relief. The compromise sent to Governor Youngkin (which he has hinted at amending) was negotiated by the Democratic-controlled Senate and the Republican-controlled House of Delegates.

As other states have made progress through tax reforms in recent years, Virginia has fallen behind by standing still. Virginia has gone down in the Rich States, Poor States ALEC-Laffer Economic Competitiveness Index in the last decade. In 2012, the state ranked 3rd for economic outlook, and it has since fallen to 24th. Over the same period, its southern neighbor, North Carolina, has risen from 23rd to 2nd by switching to a flat income tax, lowering both income and corporate tax rates, and ditching the estate tax.

Increased Standard Deduction and Exemptions for Veterans

During his campaign, Governor Youngkin signaled that he wanted to double the standard deduction and this compromise gets very close to that. The bill approved by the General Assembly increases the standard deduction from $4,500 to $8,000 for individuals and $9,000 to $16,000 for couples. Youngkin’s desired $40,000 exemption for military pensions is also included.

In 2019, the General Assembly passed a similar (though smaller) increase in the standard deduction for 2020, but it was not enough to prevent the state from falling two places in the Rich States, Poor States economic outlook ranking that year.

Tax Rebates

A $250 tax rebate for individuals and a $500 tax rebate for families, to be issued next year, are included in this budget. Virginia legislators can make these allocations in part because of excessive federal COVID-19 aid for states.

Rebates are often a better use of excess revenue than expanding government or creating new programs. With many states in a similar position to Virginia, there will be a temptation to spend this federal money on a variety of projects. However, this becomes a problem when states spend federal COVID relief money they likely will not receive again on ongoing expenses. Once the lump of federal funds dries up, state taxpayers will bear the burden of these new expenses.

Reduction of Food Tax

Governor Youngkin campaigned on eliminating Virginia’s grocery sales tax, and this bill partially accomplishes that goal. The Old Dominion is one of 13 states that imposes a sales tax on food. The plan eliminates the 1.5% tax on groceries but still allows for a 1% optional tax at the local level.

EITC Refundability

The agreement would make the Virginia earned income tax credit (EITC) refundable up to 15% of the federal EITC. This means qualifying taxpayers who receive the EITC but have no tax liability would receive some of that credit as a refund.

Funding for VRS

This approved deal includes $1 billion over the next two years to pay for unfunded liabilities in the Virginia Retirement System (VRS). This funding is estimated to increase the funding of state employee and teacher pension plans by one percent using the state’s estimates, but could be lower if using a risk-free discount rate. The latest edition of Unaccountable and Unaffordable, ALEC’s publication on unfunded public pension liabilities, estimates Virginia’s risk-free unfunded pension liabilities total over $160 billion and suggests transitioning new hires to a defined contribution system is the best way to “address key problems with pension underfunding.”

No Gas Tax Holiday

The bill approved by the General Assembly does not include the gas tax holiday requested by Governor Youngkin – a proposal considered or implemented by several states this year. In 2020, Virginia raised its gas tax by 108% and tied it to inflation (currently $0.338 tax per gallon), which Rich States, Poor States noted was part of the trend of higher taxes and spending that contributed to the decline in Virginia’s economic outlook. Nationwide, gas prices have reached some of the highest levels in U.S. history. As state leaders consider gas tax suspensions, an added dose of transparency and meaningful tax reform would be a welcome addition.


As budget negotiations continue, Virginia residents can be encouraged by efforts to lower their tax burdens – something not seen in Richmond in recent years. To see how major changes to the Commonwealth’s tax and fiscal policies would impact Virginia’s economic outlook, check out the “Adjust Policies” tool at